Franco-German Rift Threatens Plan for Banking Union

Germany and France clashed
publicly on Tuesday over plans to put the European Central Bank
in charge of supervising banks, deepening a dispute over the
scope of ECB powers that threatens to derail one of Europe's
boldest reforms.

Germany and France clashed
publicly on Tuesday over plans to put the European Central Bank
in charge of supervising banks, deepening a dispute over the
scope of ECB powers that threatens to derail one of Europe's
boldest reforms.

With time running out to meet a pledge to complete the legal
framework for an EU-wide banking union by the end of the year,
Germany's Wolfgang Schaeuble told a meeting of EU finance
ministers he could not support a plan that would give the ECB
the final say on supervision.

France's Pierre Moscovici and the ECB protested against any
watering down of a plan central to Europe's response to a
five-year banking crisis and which promises to unify the way it
deals with problem lenders, ending a previously haphazard
approach.

"The right of the last decision cannot be left to the ECB
Governing Council," Schaeuble told the meeting in Brussels, in
comments broadcast to reporters.

There could be no deal unless national supervisors had
responsibility for most banks, he added.

"A Chinese wall between banking supervision and monetary
policy is an absolute necessity," he said, also voicing
skepticism that an independent central bank such as the ECB
should even take on the tasks of supervision.

Moscovici countered that EU leaders, who had given finance
ministers responsibility for drawing up a supervisory framework,
had placed the ECB at the center of their vision.

"We have no mandate for a dual system of supervision, which
would call into question the existence of a single system for
some banks," said Moscovici, conceding after the meeting that
their differences were difficult to hide.

The depth of divisions between the two biggest euro zone
economies highlighted the difficulty in reaching agreement,
making a deadline of this year uncomfortably tight.

Tuesday's occasionally heated talks ended in disagreement
and the ministers will resume discussions on Dec. 12, news that
initially saw the euro slip against the dollar.

ECB Vice-President Vitor Constancio expressed alarm at
suggestions that the Frankfurt-based bank may not receive the
mandate to supervise lenders at all, something hinted at by
Schaeuble and spelt out bluntly by Austria's finance minister.

Maria Fekter said that EU leaders in making their pledge to
establish a new system of supervision "did not decide the
hegemony of the ECB, just involving the ECB" and accused
Constancio of misrepresenting their intentions.

The suggestion was rebutted by Constancio. "It is inside the
ECB, as the summit has decided," he said.

LONG SHOT

Most countries support the idea of banking supervision, the
first pillar of a banking union, but disagree on how best to
structure it or how far to go in unifying banking systems to
share risk and prevent discrimination between euro and non-euro
countries.

Complicating the debate further is Sweden, a non-euro zone
country that has substantial banking interests in Finland, which
uses the euro. Sweden is concerned that if the ECB is to have
oversight of assets it owns, it must have some level of equal
representation at the ECB.

Having earlier threatened to block agreement, Sweden's
Finance Minister Anders Borg appeared to soften his stance on
Tuesday, saying compromise was possible if non-euro countries
were treated fairly and national regulators retained autonomy.

Diplomats also need to address the concerns of non-euro zone
countries that aim to join the currency, such as Poland and
Hungary, which also want to ensure they are not disadvantaged by
the ECB taking a more powerful oversight of their banks.

EU leaders hope that by setting up a single, powerful
banking authority and later establishing a resolution fund for
distressed banks, they will cut the link between indebted
countries and their banking systems.

But Germany is concerned the project will develop into a
scheme under which Berlin is left to foot the bill for banks too
weak to survive on their own when, as is planned, a central
resolution scheme is set up to close troubled lenders.

It is also wary about directly recapitalizing banks from the
euro zone's rescue fund, which will be possible once banking
union is up and running.

EU leaders agreed at a summit in October that they would
have the framework for banking union agreed by year-end and the
ECB would start to take responsibility during 2013.

If ministers reach agreement on Wednesday next week, it
might allow them to finalize the framework by a summit of EU
leaders on Dec. 13-14, as long as the European Parliament also
plays its part and gives its approval.